A significant number of small businesses still sell products without invoices. They don’t keep track of their accounts using a ledger, or have an accountant to help them manage their accounts. With GST rolling out in a few months, there may be questions on how the new tax regime will impact such small businesses.
But, why would small businesses worry in the first place?
According to the Model GST Law, businesses registered for GST must file monthly returns, where they should upload details of their purchases as well as products sold. This will make it hard for small businesses to comply with the rules of the tax department. If audited by the tax authorities, they might face penalties or other forms of legal action.
To avoid this, the Indian government has come up with the composition scheme, in which small businesses that sell goods without invoices can stay compliant and pay GST at the same time.
The composition scheme that was widely followed by state VAT departments has been adapted as Section 8 of the Model GST Law. In the composition scheme, small businesses pay a percentage of their annual turnover as tax. The concept is not new, and was adopted by businesses that signed up for VAT.
A few important things to know about the composition scheme:
- To be eligible, a business must have an annual turnover of less than Rs. 75 lakhs and sell goods only within their own state.
- Businesses registered for the composition scheme cannot claim input credit or collect GST from their customers.
- The tax paid will be equal to at least 1% of the business’s annual turnover.
Signing up for the composition scheme will likely make things easy for small businesses and also keep them out of the list of tax defaulters.
Signing up for the composition scheme
When a taxable person wishes to apply for the composition scheme, they should file the application with the tax department during the beginning of the financial year (1st April).
Converting a Normal Dealer to a Composition Dealer
When a business moves from the normal GST scheme to the composition scheme, it must pay an amount equal to its available input credit. The input credit will be calculated based on the amount of input materials held in stock, as well as semi-finished and finished goods.
Converting a Composition Dealer to a Normal Dealer
On the other hand, when a business that has been paying composition tax wishes to switch to the normal tax scheme, it becomes eligible to take a tax credit. The credit will be calculated based on input held in stock as well as semi-finished and finished goods.
GST return for the composition scheme
Businesses that have registered for the composition scheme will need to file GSTR-4, a quarterly return specifically designed for compounding dealers. The return for a particular quarter should be filed on or before the 18th of the month following that quarter.
In addition to GSTR-4, businesses should also furnish the GSTR-9 (the annual return) as part of the compliance process.
Disqualification and Penalty
If tax authorities believe that a business is wrongfully enrolled or not eligible, they may disqualify the business from the composition scheme or demand a penalty equal to the tax amount.
Even though the scheme looks inviting, there are a few things that small business owners should keep in mind.
The tax percentage
The Model GST Law mentions that the tax rate under the composition scheme will not be less than 1% of annual turnover. Also, the composition rates are different based on the type of business. Here’s how it will be:
- For Traders it’s 1%.
- For Manufacturer it’s 2%.
- For restaurant sector it’s 5%.
The signup process for the composition scheme is based on Permanent Account Number (PAN), which may limit some business owners’ flexibility in signing up for the scheme. For instance, if a person owns five businesses and has registered all of them under a single PAN, they will not be able to sign up just one business for the composition scheme, but would need to sign up all five businesses if they are all eligible.
The composition scheme has the potential to offer small businesses a simple way to comply with the tax law without having facing penalties or having to overhaul their business processes.